Interest Rates: The One Thing Investors Should Watch Closely

In simple words, derivatives are contracts between two parties over a certain asset. Derivatives prices move with the price of the asset that the contracts are based on. For instance, if a trader buys derivatives betting that interest rates will go down and that doesn’t happen, the trader will lose money. The other party who took the opposite side of the contract will make money.

As per the most recent data, major U.S. banks held derivatives contracts with a notional value of $129.8 trillion that had direct exposure to interest rates. (Source: “Quarterly Report on Bank Trading and Derivatives Activities: Third Quarter 2020,” Office of the Comptroller of the Currency, last accessed December 23, 2020.)

Dear reader, this is a big amount. Just imagine if five percent to 10% of these derivatives went bad and a major bank was on the wrong side of the trade, betting that interest rates would drop further. It could create a big problem. In fact, a financial crisis could be at hand in no time.

I continue to watch bond yields closely; ultimately they tell me what’s happening with interest rates. An average investor may think that the yields don’t matter, but they do. If there are wild fluctuations, it could create volatility in the stock market.

Be careful.

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Disclaimer: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and ...

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